Supply and Demand

A core concept in determining a price is the concept of Supply vs Demand.

The principle of supply and demand states that the price of any commodity (Real Estate) varies directly with demand and inversely with supply i.e. as demand goes up, prices will go up and vice versa; and, as supply goes up, prices will go down and vice versa. In Real Estate, Supply is the amount of a type of real estate available for sale or rent at various prices in a given market for a given period of time. Demand is the desire and ability to purchase or rent Real Estate at various prices in a given market for a given period of time.

A growing local economy that produces a sudden influx of new workers into a market area, will increase the demand and result in an increase in both market prices and market values for the type of housing the workers are seeking. A sharp increase in mortgage interest rates will increase housing costs and will tend to lessen demand and therefore the property prices in the market area.

Rental properties are an influence on supply and demand and must be considered in valuations. Rent is also affected by supply and demand. A high level of vacancies or an influx of new rental properties (increased supply) will cause rents to go lower to attract renters that may otherwise purchase a property.

The single greatest factor affecting negotiations between buyer and seller usually will be the principle of supply and demand. The cost of any property will be influenced by the number of other similar properties for sale relative to the number of buyers in the marketplace. If there are few buyers and many properties for sale, the seller’s bargaining position is effectively reduced and the buyer can negotiate a lower price. This is a buyer’s market. If the situation is reversed, and there are few properties for sale and many buyers seeking to make a purchase, the seller can hold out for the maximum price. With fewer competing properties to choose from, a buyer will pay a higher price and therefore the value of a property will increase. This is also known as a seller’s market.